- April 4, 2011
- Posted by: Christopher Hanson
- Categories: Real Estate, REO
My friends at first tuesday nailed this one:
The current administration proposes that Fannie Mae and Freddie Mac be gradually dissolved within ten years by one of three methods:
1.Government-guaranteed mortgages will be available only to finance home purchases by low- and moderate-income families, a task to remain the duty of a much-downsized Federal Housing Administration (FHA). This method will reduce the percentage of mortgages guaranteed by Fannie, Freddie and the FHA — currently around 90% of all mortgages.
2.Mortgage default insurance premiums (MIPs) for government-guaranteed mortgages will be set at a high enough level so private mortgage insurers (PMIs) will be able to compete, thus eliminating the need for a government guarantee.
3.The government will act as a reinsurer of PMIs in case of their failure, for which the government will receive a premium paid by the PMIs.
It is now up to Congress to decide which of the three methods, or which combination of the three, will be implemented. On the mortgage guarantee issue, the “no on everything” contingent now seems to agree that change is needed.
first tuesday take: The administration properly presumes the private sector will step up and fill the void created in the government’s absence. In the past 30 years, Wall Street has shown time and again it can put mortgages on the street at any size and in any volume we need. The private mortgage market was responsible for producing the majority of bad loans during the housing bubble, which is proof they can find plenty of money without the help of Fannie and Freddie.
Hanson’s take: We all saw how well the Wall Street types handled the volume of real estate mortgages. On can only wonder what will happen if they are allowed to take over the entire “secondary market.” Will they become “too big to fail” – again?
More important to the discussion of replacing Fannie and Freddie, the PMI industry is fully capable of guaranteeing mortgage performance on a level equal to that of the government guarantee. PMIs understand the reserves that must be set up as they have done so before (unlike Fannie and Freddie), and they will certainly step up to the plate if they have the chance to make more money.
Hanson’s take: Hmmm. PMI, kinda like AIG?
In order to facilitate a smooth transition, however, the housing market must first recover some normalcy before implementation of the changes to phase-out the government guarantee. Fannie and Freddie’s participation will inevitably dissolve as PMIs take over the mortgage market, but now is just not the time to put that process into practice. We must first clean out the bad, nonperforming mortgages through foreclosure.
Hanson’s take: Foreclosure is the neutron bomb of real estate. The people are gone, but the buildings remain. Short Sales are (in my opinion) a joke. But nobody’s laughing anymore.
In the interim, the federal government is fulfilling its purpose during a financial crisis by providing credit to the mortgage-backed bond (MBB) market by guaranteeing, thus reducing the interest rate on mortgages that would otherwise be charged without the guarantee — whether government or private. The private market cannot stay afloat on its own until home sales volume and prices stabilize for at least two years and private MBB investors regain their confidence and recapitalize, probably by 2014.